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CBO's Health Estimates: The High Cost of Spending Other People's Money

Posted By Dennis Smith On June 24, 2009 @ 4:36 pm In Ongoing Priorities | Comments Disabled

Congress is, once again, confronted with the reality that when someone can spend someone else’s money, the cost goes up. The Congressional Budget Office estimates of spending and enrollment are not really surprising. So Congress is trying to shoehorn policies to meet the budget score. As a result, decisions are made for budget reasons – which does not necessarily mean they make good or consistent policy.

Everyone knows the cost of expanding insurance coverage is high, yet few are asking the right questions as to why. What does the CBO score really mean?

Costs of Compulsion: The CBO is basically telling us that to convince someone to do something they are not otherwise willing to do or capable of doing on their own —  in this case, buy health insurance — government has to find the right price point to change behavior. How much will it take to lure the young, healthy people to join the insurance pool? CBO obviously has a model for predicting this amount, so they should just tell the taxpayers what that amount is. Is it $5,000 for a family? $10,000? $15,000?

Then the American people will have the right information to decide if they want to go along with the deal. It is a pretty straightforward question—how much are you willing to spend to convince your neighbor to do something he won’t do for himself? If you don’t spend “enough,” then fewer people will be enrolled.

When people who are spending their own money on health insurance and health care find out that the government is giving away free money, many will make a very rational decision and stop spending their own. Out-of-pocket spending has declined over the years as a percentage of total health care spending. Shielded from the direct cost of care, utilization will increase. How much money will be spent that not to insure any new people, but replace private dollars with taxpayer dollars? CBO has a model for this. They should just tell everyone so we can decide if that is really what we want to do and for whom.

Other Peoples’ Money: When people are spending someone else’s money, they increase how much they want of it. Utilization goes up. Guess why the drug companies have reached an agreement with AARP to “fill the doughnut hole”? Because when people reach the doughnut hole and have to pay out of pocket, they use generics. If the doughnut hole is filled, they will keep buying the more expensive brand name drugs. That sums up a big part of the problem with the current third party payer system—people use more because the cost is hidden.

As Congress expands Medicaid as part of the package, states are objecting to bearing a share of the cost. So Congress is trying to buy the governors’ silence by temporarily paying the cost. Rather than providing 100 percent federal funding to soothe the states, why not move Medicaid populations into the new system and provide them with subsidies? After all, what is the policy rationale that says if you make $10 a month too little, you go to Medicaid rather than enjoy the same health care system promised to everyone else?

But CBO thinks that will cost more than current Medicaid. How can that be? Because Medicaid controls provider payments and utilization by lower reimbursement rates, which limits access. If Medicaid does such a great job at providing care at lower cost, then why not just put everyone in Medicaid? That is where a government-controlled health plan is headed.

If, as the actuaries see it, health care spending is a pie, then health care reform is simply a means of slicing it differently. Congress is now in the process of dividing the pie, which means creating winners and losers. By giving government an even greater role in the delivery of health care, health care will become even more political.


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